Credit is how a lender determines if a borrower is capable of repayment when the borrower is seeing financing. A lender determines the borrowers creditworthiness and then provides a loan with certain stipulations based on the credit.
OBTAINING A CREDIT REPORT
Consumers have the opportunity to receive a free credit report once a year. AnnualCreditReport.com is the only centralized credit reporting service authorized by Equifax, Experian and TransUnion to provide the free credit report. Don’t confuse this program with the many paid services available to consumers to monitor your credit, or the now antiquated services that provide you with credit reports from all three agencies at one “low price.”
You can go online to request, view, and print all three free credit reports:
STUDENT LOANS AND CREDIT
When financing education costs, particularly postgraduate education, good credit is needed to obtain student loans. Student loans are one of the first and most noticeable items to show up on your credit report. Creditors will quickly judge you by your record of on-time payment of lack thereof.
Grad Plus Loan Credit Criteria
Credit approval is based on federally mandated criteria, not a credit score. In order to qualify, you must not have any of the following items on your credit report:
- Any current delinquency of 90 days or more
- Any of the following within the preceding five years of the date of the credit check: default, bankruptcy, discharge, foreclosure, repossession, tax lien, wage garnishment, write-off of a Title IV debt, open collection.
Recent changes in the law establish a specific circumstance for certain Grad PLUS Loan applicants who would otherwise be considered to have an adverse credit history. Specifically, a Grad PLUS Loan applicant may qualify for a Grad PLUS Loan based on extenuating circumstances if the applicant:
- Has been or is delinquent for 180 days or less on mortgage loan payments, or on medical bill payments for the applicant or the applicant's family, AND
- Does not otherwise have an adverse credit history as determined in accordance with the federal regulations that apply to Grad PLUS Loan applicants.
A credit score is the result of a numerical calculation that takes into account the entries on your credit report. The best known and most commonly used credit score is a FICO® score, with scores ranging from a low of 300 to a high of 850. Knowing your exact FICO score is not as important as understanding what it is based on.
The FICO Ranges
What the FICO Score is Based on
Payment History (35%)
This is the largest portion of your score. Delinquent payments can have a major impact on scoring, but consistent on time payments will raise a credit score.
TIP: Be proactive against late payments. Set up automatic withdrawal or schedule online bill pay services with your bank so that a recurring monthly payment (like your credit card) is never late.
Amount Owed (30%)
The total amount of your credit line that you are currently utilizing will impact your credit score. The goal is to use less than 30% of your line of credit (add up the maximum credit line on all of your credit cards and compare it to the total amount owed in order to determine your utilization rate).
TIP: Make a focused effort to pay down your credit card debt or at the minimum, avoid creating/increasing the balance on these cards.
Length of History (15%)
The longer the history, the higher the score, and for this reason, be careful when closing accounts (like credit cards) as you may lose some of your credit history in the process.
TIP: To avoid having your oldest accounts closed, some companies may require that you use them periodically.
New Credit (10%)
A high number of inquiries (over three inside of 12 months) can be negative. Limit the number of times you allow a company to “pull your credit” for new loans and lines of credit.
TIP: There is no reason to open new credit cards. When you are checking out and paying at your favorite store and they ask you if you would like one of their cards, just say “NO”.
Type of Credit (10%)
Possessing a variety of credit is optimal. Note, there is a difference between secured versus unsecured debt and how it weighs into your final credit score.
TIP: Too much unsecured debt is never a good thing, so be conscious of the number of credit cards in your wallet. For more information, visit www.myfico.com
CREDIT REPORT ERRORS
If you find an error on your credit report, you should contact the appropriate credit agency directly:
It is important to note that the three major credit bureaus do not cross verify their information. If one credit bureau contains errors - the other two may or may not contain errors, or they may contain entirely different errors. Submitting a dispute to one credit bureau does not take care of errors reported by the other two. To cover every base, you should get copies of all three credit reports, and dispute each one separately.
If you report an error to any of the credit agencies, they are required to investigate and respond to you within 30-45 days. You should also contact the company or lender who reported the erroneous information to the credit agency.
HOW TO IMPROVE YOUR FICO SCORE
Payment History Tips
- Pay your bills on time.
Delinquent payments and collections can have a major negative impact on your score.
- If you have missed payments, get current and stay current.
The longer you pay your bills on time, the better your score.
- Be aware that paying off a collection account will not remove it from your credit report.
It will stay on your report for seven years.
- If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
This won't improve your score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.
Amounts Owed Tips
- Keep balances low on credit cards and other “revolving credit”.
High outstanding debt can affect a score.
- Pay off debt rather than moving it around.
The most effective way to improve your score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
- Don't close unused credit cards as a short-term strategy to raise your score.
- Don't open a number of new credit cards that you don't need, just to increase your available credit.
This approach could backfire and actually lower score.
Length of Credit History Tips
- If you have been managing credit for a short time, don't open a lot of new accounts too rapidly.
New accounts will lower your average account age, which will have a larger effect on your score if you don't have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.
New Credit Tips
- Do your rate shopping for a given loan within a focused period of time.
FICO® scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
- Re-establish your credit history if you have had problems.
Opening new accounts responsibly and paying them off on time will raise your score in the long term.
- Note that it's OK to request and check your own credit report.
This won't affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.
Types of Credit Use Tips
- Apply for and open new credit accounts only as needed.
Don't open accounts just to have a better credit mix - it probably won't raise your score.
- Have credit cards - but manage them responsibly.
In general, having credit cards and installment loans (and paying timely payments) will raise your score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
- Note that closing an account doesn't make it go away.
A closed account will still show up on your credit report, and may be considered by the score.
If you have any questions about your credit report or the how it affects the Financial Aid process, please contact Student Financial Services at 847-578-3217.